Saturday, August 2, 2014

Day Trading the News: Batten Down the Hatches there's a Storm Brewing

The markets are ROARING this week…
tons of trading opportunities and volatility that gets professional traders
EXCITED for next week!

If you missed the action… here’s what happened this week…

Market volatility picked up this
week the array of policy and geopolitical concerns that have lurked in the
background for weeks started to hit home.

The EU formally announced more
biting economic sanctions against Russia over its meddling in Ukraine. Argentina
entered a technical default after dragging its heels in settlement talks with
holdout creditors.

In the US, the FOMC maintained the
pace of QE tapering and tweaked its policy statement to acknowledge somewhat
higher inflation and continuing labor market slack, although the hawkish notes
garnered more attention among analysts.

The initial reading of Q2 US GDP
showed economic growth came roaring back from the Q1 stumble. The July jobs
report was less good than the excellent June numbers, but hardly weak. July
confidence, ISM manufacturing and consumer confidence all came in much stronger
than expected.

The solid US numbers contrasted
with another four -year low in European July CPI data, weak Japanese
employment, manufacturing and employment numbers and continuing geopolitical
stress emanating from Israel and Ukraine, and the VIX index of S&P500
volatility shot up toward the end of the week, trading as highs as 17.50 on
Friday, its highest level since mid-March.

During the week, the selloff in
high-yield bonds accelerated, and for the month of July registered their
biggest price declines in over a year, as lofty valuations and concerns about
the potential for interest-rate increases drove a flight from funds that hold
riskier debt.

- The FOMC adjusted its statement
in two notable ways. On the dovish side, commentary on the labor market
acknowledged that conditions had improved and "there remains significant
underutilization of labor resources".

This is consistent with Chair
Yellen's moves to watch a broader selection of employment indicators and
furnish a rationale for keeping policy easy as unemployment falls toward 6% and
beyond.

On a more hawkish note, the statement
acknowledged that inflation "has moved somewhat closer" to target and
the FOMC "judges that the likelihood of inflation running persistently
below 2% has diminished somewhat," removing the previous warning about the
risks of persistently low inflation.

- The other major change in the decision was Philadelphia Fed President
Plosser's dissent, in objection to the low rates for "a considerable time
period" language.

In a letter of explanation
released on Friday, Plosser said the job market has improved more rapidly than
expected yet the Fed hasn't shifted course, warning the FOMC's language was an
inappropriate characterization of the future path of policy and could limit
flexibility going forward.

Dallas Fed President Fisher said
that despite his opposition to some Fed policies, he felt the debate within the
committee had shifted in his direction, especially given the FOMC statement
language that inflation was moving closer target.

- The Q2 US GDP data was very strong, at +4.0% v +3.0%e, and the final Q1
reading was revised to -2.1% from -2.9%. Two components had an outsized role in
sending the headline number higher: consumption and inventories.

Consumption bounced back from a
+1.2% rate in Q1 to a healthy +2.5% rate in Q2, concentrated in durable goods
spending. Meanwhile, inventories added about 1.6 percentage points to the GDP
figure, which more than offsets the 1.16 point drawdown in inventories seen in
Q1.

- General Motors, Ford and Chrysler all reported another strong month of sales
gains in July, though the numbers ran slightly below expectations. Ford and GM
sales gained 10% and 9.4%, respectively, while Chrysler sales were up 20% y/y.
Ford's truck sales recovered from June's slide lower, and GM's inventory fell.
A GM sales executive said strong sales should continue through the balance of
the year, with plenty of pent-up demand for trucks and SUVs. Toyota and Nissan
both saw 11%+ gains in sales.

- Portugal's Banco Espirito Santo is at the edge of collapse after the firm's
reported a giant €3.57 billion loss for the first half of the year. The bank
holding company, RioForte, and units Espirito Santo International SA Espirito
Santo Financiere all sought bankruptcy protection in Luxemburg. There were
reports that the Portugal government would bail out the company with public
funds, just days after the Bank of Portugal said the firm would be able to
resolve its capital shortfall in public markets.

- Most of the energy majors reported quarterly results this week. Exxon,
Chevron, and Conoco all beat earnings expectations on solid profit growth,
thanks to higher oil prices, although all three saw production fall y/y.
Second-tier names Occidental and Marathon also saw similar results. Refiners
Phllips 66 and Valero both missed earnings expectations thanks to a slump in
refining profits, as margins fell on the higher crude prices in the quarter.

- Pharma giant Amgen crushed expectations on 23% y/y net profit growth and
hiked its FY14 guidance. Amgen also said it would cut 12-15% of its workforce
and restructure operations. Pfizer and Merck saw solid profit gains, although
revenue at both firms was stagnant and both tightened up guidance. Regarding
its failed bid for AstraZeneca, Pfizer's CEO said he was still open to M&A
deals, regardless of size.

- Kellogg and Colgate missed revenue expectations and Kellogg cut its FY14
guidance outlook. Kellogg saw revenue sag in key North America markets, while
overall revenue fell slightly. Clorox's result was more muted, and the firm
warned FY15 revenues would be flat. Procter & Gamble reported strong
quarterly results, good FY15 guidance and disclosed a plan to sell off up to
100 of its brand holdings. Card companies Visa, MasterCard, and American
Express all disclosed very strong results, with solid gains in payment volumes.

- Shares of momentum names Tesla, LinkedIn, and Twitter saw strong gains
post-earnings. All three had good quarters, however shares of Twitter
outperformed the bunch, gaining approximately 25% in after-hours trading on
Tuesday. Twitter quieted doubters with big gains in MAUs, advertising revenue,
and overall performance seen in the firm's second quarter.

- Two high-profile merger deals announced this week were immediately met with
skepticism. Online real estate site Trulia agreed to be acquired by competitor
Zillow for $3.5 billion in stock. Critics point out that neither company is
profitable and the promised cost savings from the deal would get the combined
company to about breakeven. Family Dollar agreed to be acquired by Dollar Tree
for $74.50/share, in a total deal valued at $9.2 billion. Activist Carl Icahn
has been pushing FDO to sell itself to one of the other dollar store operators,
and analysts note that both firms have flagging sales, very different business
models and few cost saving synergies.

- The one-way trade in EUR/USD turned around in the second half of the week
after the US jobs report. By Wednesday, the pair had dropped to eight-month
lows around 1.3370, driven lower by the continuing contrast between US economic
recovery and Europe's slow slide into deflation, Russia sanctions, US GDP
strength and hawkish notes in the FOMC statement. However the slightly
less-than-perfect jobs report on Friday gave FX traders an excuse to buy the
euro, sending the pair back to the highs of the week, around 1.3445.

- In July, cable posted its worst monthly performance since March 2013, down
about 1.2%. GBP/USD tested below 1.6820 briefly on Friday. Analysts suggest the
recent run of softer UK economic data has shifted market expectations on the
timing of a rate hike to early 2015 from late 2014. In Japan, the weaker data
sent USD/JPY out to six-week highs above 103.

- The Shanghai Composite remained relatively insulated from the turmoil in the
US markets, rising another 2.8% this week following last week's 3.2% leap.
Beijing's targeted mini-stimulus measures have clearly hit their mark, as China
industrial profits grew at the fastest pace in 5 months, and the official
manufacturing PMI topped consensus by three-tenths to reach 27-month high at
51.7. Comments from the National Bureau of Stats were tempered after these
data, noting the low base effect in industrial profits and also warning about
the risks remaining in the smaller sectors of the economy. The HSBC
manufacturing PMI, which surveys less prominent firms, did decline to 51.7 from
the 52.0 flash print but still remains at an 18-month high.

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